Bank of Canada Holds Interest Rate at 2.25% amid Inflation, Growth Challenges

The Bank of Canada kept its benchmark interest rate unchanged at 2.25% for the fifth consecutive meeting, in line with market expectations, as policymakers balance slowing economic growth against rising inflation pressures linked to global oil price shocks.

Bank of Canada Governor Tiff Macklem said the central bank faces a “dilemma” in managing the conflicting risks of weaker economic activity and accelerating inflation.

“Weak economic activity alongside higher inflation puts monetary policy in a difficult position,” Macklem said, explaining that raising rates to contain inflation could further slow growth, while cutting rates to support the economy could risk allowing inflation to become more persistent.

He added that maintaining the current interest rate level provides the right balance between these competing risks for now.

Despite keeping rates unchanged, Macklem stressed that monetary policy must remain “flexible and responsive” as uncertainty continues. He reiterated that rate cuts could be considered if major new trade restrictions from the United States create additional pressure on the Canadian economy.

However, he warned that a prolonged conflict involving Iran and sustained energy price increases could create broader inflationary pressures, potentially requiring tighter monetary policy.

“If the Middle East conflict continues and higher energy prices begin feeding into broader and lasting inflation, monetary policy may need to do more, including potentially a series of interest rate increases,” Macklem said.

The Canadian dollar remained relatively stable after the decision, gaining around 0.2% to trade at 1.3915 Canadian dollars per US dollar, while Canadian government bond yields edged slightly lower.

The Bank of Canada said evidence that higher energy prices are spreading into other goods and services remains limited so far. However, Macklem noted that oil prices remain elevated due to the ongoing Iran conflict, with crude prices around $10 per barrel higher than the assumption used in the bank’s April monetary policy report.

The central bank expects inflation to remain close to 3% in the coming months before gradually easing toward its 2% target.

Canada’s annual inflation rate rose to 2.8% in April, driven mainly by higher energy prices, although it came in below economists’ expectations. Core inflation measures also declined during the month, suggesting underlying price pressures remain contained.

The rate decision followed data showing that Canada’s economy contracted by 0.1% year-on-year in the first quarter of 2026, after shrinking 1% in the fourth quarter of last year.

The central bank said economic growth appears to be recovering in the second quarter but expects excess capacity in the economy to continue weighing on activity.